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OUR WAY OR THE HIGHWAY?Audit Issues
Office of the State AuditorCounty Highway Accountant’s ConferenceMay 10, 2007
Suggested Topics
•Rules, regs regarding the differences between quotes and bids;•Most common audit findings;•Accounting for overlays•Audit adjustments•How to prepare for an audit;•Etc.
Mind Your Bids and Quotes
• Minn. Stat. §471.345• Minn. Stat. §331A.03• Minn. Stat. §471.35• Minn. Stat. §375.21• Minn. Stat. §160.17
471.345 UNIFORM MUNICIPAL CONTRACTING LAW.
• Subdivision 1. Municipality defined. For purposes of this section, "municipality" means a county, town, city, school district or other municipal corporation or political subdivision of the state authorized by law to enter into contracts.
• Subd. 2. Contract defined. A "contract" means an agreement entered into by a municipality for the sale or purchase of supplies, materials, equipment or the rental thereof, or the construction, alteration, repair or maintenance of real or personal property.
471.345 UNIFORM MUNICIPAL CONTRACTING LAW.• Subd. 3. Contracts over $50,000. If the amount of the contract is
estimated to exceed $50,000, sealed bids shall be solicited by public notice in the manner and subject to the requirements of the law governing contracts by the particular municipality or class thereof provided that with regard to repairs and maintenance of ditches, bids shall not be required if the estimated amount of the contract does not exceed the amount specified in section 103E.705, subdivisions 5, 6, and 7.
• Subd. 4. Contracts from $10,000 to $50,000. If the amount of the contract is estimated to exceed $10,000 but not to exceed $50,000, the contract may be made either upon sealed bids or by direct negotiation, by obtaining two or more quotations for the purchase or sale when possible, and without advertising for bids or otherwise complying with the requirements of competitive bidding. All quotations obtained shall be kept on file for a period of at least one year after receipt thereof.
471.345 UNIFORM MUNICIPAL CONTRACTING LAW.• Subd. 5. Contracts less than $10,000. If the amount of the contract is
estimated to be $10,000 or less, the contract may be made either upon quotation or in the open market, in the discretion of the governing body. If the contract is made upon quotation it shall be based, so far as practicable, on at least two quotations which shall be kept on file for a period of at least one year after their receipt.
• Subd. 5a. County or town rental contracts. If the amount of a county or town contract for the rental of equipment is estimated to be $60,000 or less, the contract may, in the discretion of the county or town board, be made by direct negotiation by obtaining two or more quotations for the rental when possible and without advertising for bids or otherwise complying with the requirements of competitive bidding. All quotations shall be kept on file for a period of at least one year after their receipt.
471.345 UNIFORM MUNICIPAL CONTRACTING LAW. • Subd. 5b. Water tank service contracts. • Subd. 6. Applicability of other laws. • Subd. 7. Minimum labor standards. • Subd. 8. Procurement from economically disadvantaged persons. • Subd. 9.[Repealed, 1990 c 549 s 3]• Subd. 10. Shared hospital or ambulance service purchasing. • Subd. 11. Fuel contracts for generation of municipal power.• Subd. 12. Procurement from rehabilitation facilities. • Subd. 13. Energy efficiency projects. • Subd. 14. Damage awards. In any action brought challenging the validity
of a municipal contract under this section, the court shall not award, as any part of its judgment, damages, or attorney's fees, but may award an unsuccessful bidder the costs of preparing an unsuccessful bid.
471.345 UNIFORM MUNICIPAL CONTRACTING LAW.• Subd. 15. Cooperative purchasing. A municipality may contract for the
purchase of supplies, materials, or equipment is through a national municipal association's purchasing alliance or cooperative.
• Subd. 16. Reverse auction. Notwithstanding any other procedural requirements of this section, a municipality may contract to purchase supplies, materials, and equipment using an electronic purchasing process in which vendors compete to provide the supplies, materials, or equipment at the lowest selling price in an open and interactive environment.
• Subd. 17. Electronic sale of surplus supplies, materials, and equipment.• Subd. 18. Electronic bidding. Notwithstanding any other procedural
requirements of this section, vendors may submit bids, quotations, and proposals electronically in a form and manner required by the municipality. A municipality may allow bid, performance, or payment bonds, or other security, to be furnished electronically.
• Subd. 19. Town road construction and maintenance. …a town may contract for the construction or maintenance of a town road by agreeing to the terms of an existing contract between a vendor and a county for road construction or maintenance on an adjoining road if the existing county contract was made in conformance with all applicable procedural requirements.
Minn. Stat. §375.21 Contracts of County Boards• When required by the dollar limitations of section
471.345, a contract for work or labor, or to purchase furniture, fixtures, or other property, or to construct or repair roads, bridges, or buildings shall be made by a county board only after advertising for bids or proposals in a qualified legal newspaper of the county. For the purchase of property or for work and labor, two weeks' published notice that proposals will be received, stating the time and place, shall be given. For the construction or repair of roads, bridges, or buildings, three weeks' published notice shall be given. The notice shall state the time and place of awarding the contract and contain a brief description of the work. Every contract shall be awarded to the lowest responsible bidder and duly executed in writing. The person to whom a contract is awarded for work or labor or for the construction or repair of roads, bridges, or buildings shall give a sufficient bond to the board for its faithful performance. If no satisfactory bid is received, the board may readvertise.
471.35 SPECIFICATIONS OF SUPPLIES OR EQUIPMENT
• When any county, city, town, or school district calls for bids for the purchase of supplies or equipment, specifications shall not be so prepared as to exclude all but one type or kind but shall include competitive supplies and equipment.
162.04 LIMITATION ON PAYMENT OF CONTRACT PRICE.
• County state-aid highway• 5% retainage• 30 days to pay• 90 days for final• No interest if due to breach of contract
160.17 ROAD CONSTRUCTION CONTRACTS; COUNTIES AND TOWNS. • Plans and specifications filed
– Plans must be on file with County auditor• Advertisement for bids
– Advertise for bids in official newspaper– Once a week for three weeks– Last must be 10 days before opening
• Final payment – No final payment until work certified
574.26 CONTRACTORS' BONDS FOR PUBLIC WORK • For contracts over $75,000
– a contract with a public body for the doing of any public work is not valid unless the contractor gives (1) a performance bond to the public body with whom the contractor entered into the contract, for the use and benefit of the public body to complete the contract according to its terms, and conditioned on saving the public body harmless from all costs and charges that may accrue on account of completing the specified work, and (2) a payment bond for the use and benefit of all persons furnishing labor and materials engaged under, or to perform the contract, conditioned for the payment, as they become due, of all just claims for the labor and materials. Reasonable attorneys' fees, costs, and disbursements may be awarded in an action to enforce claims under the act if the action is successfully maintained or successfully appealed.
331A.03 WHERE NOTICE PUBLISHED
• Generally– Qualified newspaper
• Alternative dissemination of bids and requests– Web site
Common Findings
• Not many relating to Highway Departments– Not bidding when required
• SAS 112 Communicating Internal Control Related Matters Identified in an Audit
Accounting for Overlays (Repair vs. Improvement
• The historical cost of a capital asset should include the cost of any subsequent additions or improvements but exclude the cost of repairs. An addition or improvement, unlike a repair, either enhances a capital asset’s functionality (effectiveness or efficiency), or it extends a capital asset’s expected useful life. For example, periodically resurfacing a road, (assuming that the road surface was not treated as a separate asset in its own right), would be treated as a repair (i.e., the cost would not be capitalized), whereas adding a new lane would constitute an addition (i.e., the cost would be capitalized)
Accounting for Overlays
• What is your policy?• Is the county doing about the same amount of overlay
annually?• How are you reporting road?
– In pieces– In total
What are those auditors doing?
• Why or how can the auditors change my actual Capitalized figures when I have construction pages to back my figures and without any conversation regarding these figures prior to submitting it to you?– Auditors should audit– Auditors should communicate
• Who should they communicate with…..• How should it be communicated…..
– Preparers need to understand what auditors have proposed (audit adjustments)
Preparing for an Audit
• Here are some simple steps to prepare for an audit that will make the audit process more effective and efficient, decrease the amount of time the auditors are on-site, minimize the disruption to your operations, and increase the likelihood that the audit yields valuable benefits to the auditee.
Preparing for an Audit
• Designate a principal liaison person(s) to work with the auditors - this person should be responsible for ensuring the auditor's have access to records and files they need as well as directing the auditors to the appropriate responsible individual to learn about program operations or to answer questions.
• Arrange for an appropriate staff person to provide an overview of agency operations and a tour of agency facilities - this enables the auditors to gain a perspective on the entirety of your operations. Assemble appropriate and current background information about the agency, program, or activity for the auditors.
Preparing for an Audit
• Arrange suitable on-site office space for the auditors that they can use for the duration of their fieldwork - the space should be reasonably accessible to the records and people they will interact with.
• Inform your staff about the audit and audit scope and instruct them to cooperate with the auditors in providing information and access to records, files, etc.
Preparing for an Audit
• Organize your financial records, computer files, etc. before the auditors arrive - audits by nature are a documentation driven process - having your information organized and accessible will make the process easier for both the auditors and auditee. If any records applicable to the audit period are stored off-site, arrange to have the records returned, if possible, or make arrangements to allow retrieval on a timely basis.
• Have copies of prior year financial statements, financial statement worksheets, audit reports etc. for the auditors.
• If the audit is a financial statement audit, recognize that the agency's financial statements are the responsibility of auditee management - the auditor's responsibility is to audit, not prepare the financial statements. Inform the auditors of your schedule to close your books, prepare draft financial statements and complete supporting schedules.
Preparing for an Audit
• If the audit involves federal funds, accumulate communications from the federal grantor regarding new requirements or changes in program operations, assemble reports filed with the federal grantor, accumulate relevant compliance requirements, and provide copies of any audit reports performed by the federal government or official communications from the federal grantor.
• If a computer system is key to your operations, arrange for a person knowledgeable about the computer system to be available to explain the system's operations and to facilitate retrieval of data and generation of reports.
• Identified key internal controls in your operations and whether they are effective
Preparing for an Audit
• Schedule time to meet with the auditors periodically throughout the audit to learn about the progress of the audit, facilitate communication, resolve issues on a timely basis, and correct any misunderstandings.
• These are general steps recommended to prepare for an audit. Specific steps and information requests that are unique to your audit will be communicated to you as part of the initial contact and planning meeting with the auditors.
